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Imposing Zakat on Legal Entities and Its Applications to Islamic Financial

Institutions1

By Dr Azman bin Mohd Noor and Muhamad Nasir Haron, Department of Fiqh and Usul

al-Fiqh, International Islamic University Malaysia. Email: [email protected]

Abstract

Zakat is imposed on particular assets own by Muslims. However as there has been

a tremendous development in trades locally and globally, and with the growth of Islamic

banking and finance and the increase of demand for Shariah compliance services and

supplies, there is a suggestion by some contemporary Muslim scholars to impose zakat on

the legal entity. This implies that the calculation is based on the company’s net asset value.

Based on this proposition, there is no need to look at who are the shareholders whether

they are government link companies, foreign parent companies or individual

proprietors, Muslims or non Muslims. This paper aims at examining the validity of

imposing zakat on the legal entities from Shariah perspective.

1 This paper was presented at International Zakat Conference, organized by Dompet Zakat Indonesia, Bogor,

Indonesia by 19-21 July 2011.

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Introduction

Incorporation has been a vital force to mobilize large amount of capital from a wide range of

investors in scale enterprise and industry throughout the modern world including the

Muslim countries. However, is this principle acceptable in the Islamic economy and does

Islam acknowledge the concept of legal entity? The research aims to explain this concept and

imposing zakat on it from the Shari‘ah point of view.

The Concept of Legal Entity

According to Sheikh Taqi Uthmani,2 the concept of legal entity could also be seen in the

concept of limited liability as they share the same characteristic. Limited liability from the

modern economic and legal terminology is a concept whereby a person's financial liability is

limited to a fixed sum, most commonly the value of a person's investment in a company or

partnership with limited liability. In other words, if a company with limited liability is sued,

then the plaintiffs are suing the company, not its owners or investors. A shareholder in a

limited company is not personally liable for any of the debts of the company, other than for

the value of their investment in that company. This usually takes the form of that person's

dividends in the company being zero, since the company has no profits to allocate. The same

is true for the members of a limited liability partnership and the limited partners in a limited

partnership.3

According to Sheikh taqi Utmani the concept of legal entity has Shariah grounds such as waqf,

bait al-mal, khultah and mudarabah funds.

Waqf is a legal and religious institution wherein a person dedicates some of his properties for

a religious or a charitable purpose. The properties, after being declared as Waqf, no longer

remain in the ownership of the donor. The beneficiaries of a Waqf can benefit from the

2 Usmani, Taqi, An Introduction to Islamic Finance, Maktaba Ma`riful Qur`an, p221 3 http://en.wikipedia.org/wiki/Limited_liability

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corpus or the proceeds of the dedicated property, but they are not its owners. Its ownership

vests in Allah alone.

In this note we can see that waqf has been treated as a separate legal entity and considered

to have some similar characterictics to those a natural person. We can see from the rulings

given by the fuqaha’ (Muslim jurists) in respect of Waqf which are; if a property is purchased

with the income of a Waqf, the purchased property cannot become a part of the Waqf

automatically however it rather shall be treated as a property owned by the Waqf.4 Also

same goes to the money given to a mosque as donation does not form part of the Waqf, but it

passes to the ownership of the mosque. Here again the mosque is accepted to be an owner of

money.5

It is clear from these examples that the Muslim jurists have accepted that a Waqf can own

properties. Obviously, a Waqf is not a human being, yet they have treated it as a human being

in the matter of ownership. Once its ownership it established, it will logically follow that it

can sell and purchase, may become a debtor and a creditor and can sue and be sued, and thus

all the characteristics of a 'juridical person' can be attributed to it. 6

Sheikh Taqi Uthmani has proposed a takaful model based on the principle of waqf where all

the premiums from the depositors are regarded to be owned by the waqf institution. Takaful

operators in Pakistan and South Africa are using this model.

Another classical juristic example of legal entity is Bait al-mal which is the treasury or inland

revenue of an Islamic state. Being public property, all the citizens of an Islamic state have

some beneficial right over the Baitul-mal, yet, nobody can claim to be its owner. Still, the

Baitul-mal has some rights and obligations. Imam Al-Sarakhsi, the well-known Hanafi jurist,

says in his work "Al-Mabsut":

"The Baitul-mal has some rights and obligations which may possibly be undetermined."7

He also said: "If the head of an Islamic state needs money to give salaries to his army, but he

finds no money in the Kharaj department of the Baitul-mal (wherefrom the salaries are

generally given) he can give salaries from the sadaqah (Zakah) department, but the amount so

taken from the sadaqah department shall be deemed to be a debt on the Kharaj department".8

It seems that not only the Bait al-mal, but also the different departments therein can borrow

and advance loans to each other. The liability of these loans does not lie on the head of state,

4 Al-Fatawa al-Hindiyyah, Waqf, ch.5, v.2, p.417. 5 Al-Khurashi, Al-khalil, v7, p.80 ((This principle has been expressly mentioned by some jurists of the Maliki school also. They have stated that a mosque is capable of being the owner of something. This capability of the mosque, according to them, is constructive, while the capability enjoyed by a human being is physical)) 6 Usmani, Taqi, An Introduction to Islamic Finance, Maktaba Ma`riful Qur`an, p226.

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7 Sarakhsi, Al-Mabsut, v14, p33. 8 Opcit.v3,p18 9 Usmani, Taqi, An Introduction to Islamic Finance, Maktaba Ma`riful Qur`an, p228. 10 Narrated by al-Bukhari, Kitab al-Zakat, hadith no. 1382. 11 See, Ali Muhyi al-Din al-Qura Daghi, , al-shakhsiyah al-I’tibariah wa Ahkamuha al-Fiqhiyyah fi al- Dawla al-muasirah, p15

12 Al-Shirazi, al-Muhazzab. 13 Al-Bahuti, Kashshaf al-Qina’, vol. 2,p. 192 14 Ibn Muflih, al-Furu’, vol.2, p. 293 15 Usmani, Taqi, An Introduction to Islamic Finance, Maktaba Ma`riful Qur`an, p228. 16 Al-Hattab, Mawahib al-Jalil, vol. 2,p.267, al-Qarafi, al-Zakhirah, vol. 3, p. 79. 17 Al-Shafi;i, al-Umm, vol. 2, p. 14 18 Al-Nawawi, al-Majmu’, vol. 5, p. 408, al-Sharbini, Mughni al-Muhtaj, vol. 1, p. 377 19 Al-Qurrahdaghi, Buhuth fi al-Fiqh Qadaya Zakat al-Mua`sirah, p 262. 20 Al-Qardhawi, Fiqh al-Zakat,vol. 1p. 95. Ibn al-Humam, Fath al-Qadir, vol. 2, p. 153, Ibn ‘Abidin, Hashiyah Radd al-Muhtar, vol. 2, p. 259, Mawahib al-Jalil, vol.2,p. 366, Sharh Mukhtasar Khalil, vol. 2, p. 157. al-Sharbini, Mughni al-Muhtaj, vol. 2, p. 121, Ibn Qudamah, al-Mughni,vol. 4, p. 69. 21 The hadith is narrated by al-Bukhari and Muslim. 22 AL-Nawawi, al-Majmu’, vol5, p.391. 23 al-‘Abdari, Al-Taj wa Iklil li Mukhtasar Khalil, vol. 2, p. 266. 24 AL-MAwsuah Fiqhiyyah KUwaitiyyah, Madah khultah.j16,p224. 25 Ibn Qudama, Al-Mughni, v2,p609/ Al-Dusuqi, Sharh Kabir, v1,p440/ Al-Qalyubi, Sharh Minhaj wa Hasiyyah12/2. 26 Ibn Rush, Bidayat al-Mujtahid, vol. 1, p. 264, al-Hattab, Mawahib al-Jalil, vol. 2, p. 267 27 al-Shafi’I, al-Umm, vol.2, p.14, al-Sharbini, Mughni al-Muhtaj, vol. 1, p. 377, Ibn Qudamah, al-Mughni, vol. 2, p. 249, al-Bahuti, Kashshaf al-Qina’, vol.2, p. 198 28 Al-Nawawi, al-Majmu’, vol. 5, p.404, al-Sharbini, Mughni al-Muhtaj, vol. 1, p. 376, Ibn Qudamah,al-Mughni, vol. 2, p. 249, al-Bahuti,Kashshaf al-Qina’, vol. 2,p. 196 29 Al-Dardir, al-Sharh al-Kabir, al-Qarafi, al-Zakhirah. 30 For further discussion see http://www.islam-qa.com/ar/ref/69912 31 Al-Buti, al-Shaksiyyah al-I’tibariyyah, Ahalliyatuhawa Hukm Ta’aluq a;-Zakat Biha

IMPOSING ZAKAH ON LEGAL ENTITIES

As corporate entities have been established and acknowledged by Shariah the question is

whether it is obligated to pay zakat like natural Muslim persons. There is a need to look to

the most important conditions upon obligation to pay zakah which are among others, the

individual (zakah payer) must be Muslim, the property must be owned by particular

individual (mu’ayyan), there must be a complete ownership over the zakah property (al-

milkiyyah al-tamah) as well in term of nisab (mimimum value of asset which makes it

subject to zakat) and hawl (one year completion of zakat financial year) of zakatable items.

There are two major different opinions of contemporary scholars on whether a legal entity

should be responsible to pay zakat as held by contemporary scholars:30

1) This is the view of some contemporary scholars such al-Buti31, Dr Wahbah al-Zuhaily

, Dr Hassan al-Amin and others which upholds the obligation of zakat remains restricted to

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32 Shahatah,Shawki Ismail, Muhasabat Zakat al-Mal,’Iman wa Amalan, 1st Edition, 1970, p. 92. 33 See Dr Abdullah bin Mansur al-Ghufaily, Nawazil al-Zakat, pg185. 34First Zakat Conference, Kuwait, Rejab 29, 1404/ April 30, 1984. See http://zakat.al-islam.com/def/default.asp?l=arb&filename=Quest/desc/item6/item2/desc2 35 Fourth Conference, Resolution no 3, 4/08/88, Jeddah, 18-23 Jamadil Akhir, 1408, 6-11 February 1988

the individuals. Each property owner or shareholders shall pay zakat when his portion of

asset has reached his own nisab and hawl.

2) The second view is largely attributed by Dr. Shawki Ismail Shahatah32, Dr Mahmud

al-Farfur, Dr Ahmad Majzub and Dr Ali Muhyiddin al-Qurrah Daghi33. This opinion accepted

the concept of shaksiyyah iktibariyyah (legal entity) for the company. Therefore, the

company is required to pay zakat as it is required from an ordinary human being or natural

person. In this case the company will pay zakat on behalf of the shareholders.

This is in line with what the First Zakat Conference had resolved 34 with regards to Zakat of

the company and its shares:

“The duty of to pay zakat on the company (by shares) is imposed on the company itself

based on the concept that such company possesses shakhsiyyah iktibariyyah (legal entity) in

the following situations:

a) There is a law compelling the company (to give out zakat)

b) The company’s article of association provides for such.

c) The General Meeting of the company has issued a resolution on that matter.

d) The shareholders of the company have consented to it.”

The Majma' al-Fiqh al-Islami resolved almost similar rulings: 35.

First: Zakat on the shares of the company is compulsory for the owners, and the company

will pay zakat on behalf of the owners if such is stated in the company’s article of

association, or agreed upon during the company's general meeting, or if there is any

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existing law requiring the company to pay zakat, or if there is an authorization from the

shareholders for the company to pay zakat on their behalf.

Second: The Company should pay zakat the same as any other ordinary individual. This

means that the company shall treat the shares of the shareholders as a property owned by

one individual upon which zakat is obligated upon the property, and the calculation is like

the property is owned by one person in the types of the properties, its nisab or the amount

of zakat payable on the property. All the above are based on the concept of "al-khultah"

which, as opined by several fiqh jurists, should be applicable in other properties as well (i.e.

not only restricted to livestock).

The resolution also prescribes exclusion:

, ومنها أسهم الخزانة العامة , " ويطرح نصيب األسهم التي ال تجب فيها الزكاة

".وكذلك أسهم غير المسلمين , وأسهم الجهات الخيرية , وأسهم الوقف الخيري

“The portion of shares of the asset which are not subject to zakat should be excluded from

calculation such as the shares owned by Public Treasury, waqaf property, property

belonging to charitable organizations as well as property owned by the non-Muslims.”

Nevertheless, in paying zakat, the company shall consider all the general conditions and

necessary requirement to pay zakat for individual. Therefore, when the company wants to pay

zakat, it should consider all the requirement of an individual to pay zakat like Islam, nisab, al-

nama’ and complete ownership. Therefore, in the payment of zakat, the company should exclude

the ownership of non Muslim, the public ownership and charity organizations.

ZAKAT ON GOVERNMENT FULLY-OWNED AND PARTLY-OWNED COMPANIES

There are two views on this issue. The first view indicates that the zakah shall not be

imposed to the government-owned companies although they are formed for profit

purposes. However, it is by the condition that the profit must be submitted back to the

government directly or indirectly. This is also opinion that accepted by majority of the

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36 al-Sarakhsi, al-Mabsut, vol. 3, p. 52, al-Dasuqi, Hashiyah al-Dasuqi, vol. 1,p.487, al-Sharbini, Mughni al-Muhtaj, vol. 1, p.412, Matalib Uli al-Nuha, vol. 2, p. 16. 37 Al-Zuhayli, Wahbah, Hukm al-Zakat fi Amwal Manshaat al-Qita' al-Amm al-Hadifah li al-Ribh wa Hukm Zakat al-Sharawat al-Batinah wa al-Sanadat al-Hukumiyyah, Abhas wa 'Amal al-Nadwah al-Thalithat 'Ashara li Qadhaya al-Zakat al-Mu'asirah, Khourtum, Sudan, 8-11 Safar 1425/ 29 March - 1April 2004, p. 234-236. 38 Al-Sarakhsi, al-Mabsut, 3/52 39 See his commentary in Abhas wa 'Amal al-Nadwah al-Thaminah li Qadhaya al-Zakat al-Mu'asirah, Qatar, 23-26 Zul Hijjah 1418 – 20-23 April 1998, p. 420-421 40 See his commentary in Abhas wa 'Amal al-Nadwah al-Thaminah li Qadhaya al-Zakat al-Mu'asirah, Qatar, 23-26 Zul Hijjah 1418 – 20-23 April 1998, p. 422-424 41 See his commentary in Abhas wa 'Amal al-Nadwah al-Thalithat 'Ashara li Qadhaya al-Zakat al-Mu'asirah, Khourtum, Sudan, 8-11 Safar 1425/ 29 Mac - 1April 2004, p. 310. 42 See his commentary in Abhas wa 'Amal al-Nadwah al-Thalithat 'Ashara li Qadhaya al-Zakat al-Mu'asirah, Khourtum, Sudan, 8-11 Safar 1425/ 29 Mac - 1April 2004, p. 317-318 43 See his commentary in Abhas wa 'Amal al-Nadwah al-Thalithat 'Ashara li Qadhaya al-Zakat al-Mu'asirah, Khourtum, Sudan, 8-11 Safar 1425/ 29 Mac - 1April 2004, p. 320-321 44 See his commentary in Abhas wa 'Amal al-Nadwah al-Thalithat 'Ashara li Qadhaya al-Zakat al-Mu'asirah, Khourtum, Sudan, 8-11 Safar 1425/ 29 Mac - 1April 2004, p. 322-323 45 Al-Bayan al-Khitami, wa al-Fatawa wa al-Tawsiyyat, al-Nadwah al-Thalithat 'Ashara li Qadhaya al-Zakat al-Mu'asirah, Khourtum, Sudan, 8-11 Safar 1425/ 29 March - 1April 2004, p. 414

jurists such as Abu Hanifah, Abu Yusuf, the Malikites and the Hanbalites in general.36

According to Sheikh Al-Zuhayli on this matter, since the company owned by the government

whether it belongs to public sector or state, they are included under the category of public

properties and not subject to zakah even it is profit oriented. It is because though most of

government companies fulfilled the requirement of an-nama` (growth) but still does not

satisfy the requirement of complete ownership.37 In addition, it is also argued that zakat is a

special act of worship which requires intention, and this intention should come from the

right owner of the asset.

Nonetheless, Muhammad Ibn Al-Hasan Al-Shaybani38a disciple of Abu Hanifah on the

second view holds that zakah should be imposed on the public companies that are

established to make profits. This view is supported by the several of contemporary jurists

such Dr. Muhammad Nu'aym Yasin39, Dr. Rafiq al-Misri40, Dr 'Abd al-Hamid al-Ba'li41, Dr.

Hasan al-Bily42, Dr. Muhammad Sir al-Khatm43 and Dr. Muhammad bin 'Aqil44. Similarly,

Article 37 of Qanun Zakat Sudan states that public companies and properties are exempted

from the payment of zakat only when such properties are not used for profit gaining. If the

properties are used for the purpose of generating profit, that properties are subjected to

zakat.

However, in the case of the companies partly owned by government and partly owned by

the private which established on the basis of profit oriented, the Nadwah Zakah Mua`sirah

resolved that the public property (government shareholders should be subject to the Zakah

as the private shareholders. Nonetheless, there are some jurists who do not oblige to these

kind of property due to it mixed nature.45

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46 In this particular issue of government and government link companies zakat, the researcher refers extensively with some modifications to the unpublished paper wrote by Aznan Hassan “Zakat on Shakshiyyahi'tibariyyah, Workshop on Zakat for Islamic Financial BNM Lanai Kijang, 3 May 2011. 47 Dr Aznan bin Hasan, Zakat on Shakshiyyah i'tibariyyah, Workshop on Zakat for Islamic Financial

Institutions, BNM Lanai Kijang, 3 May 2011. 48 Abu Mukh, Hannan ‘Abd al-Rahman, Zakat al-Sharikat fi al-Fiqh al-Islami, Dar al-Ma’mun, Amman, 1st Edition, 2007, p. 137. Taken from Dr Aznan’s paper. 49 Al-Qurrahdaghi, al-Syaksiyyah al-I’tibariyyah wa Ahkamuha fi al-Dawlah al-Islamiyyah.,p,240.

Perhaps the opinion of Muhammad Ibn al-Hasan al-syaibani can be considered in certain

circumstances for the contemporary needs since the beneficiary of zakat will be for the

benefit of Islam and Muslims.

3-ZAKAH OBLIGATIONS ON LEGAL ENTITY OWNED COMPLETELY OR PARTIALLY BY

NON-MUSLIMS.46

As discussed earlier, there has been ijma’ of Muslim jurists that non Muslims are not

obligated to pay zakat . In this light, majority of Muslim scholars hold that non-Muslims are

not obliged to perform acts of worship such as salah and zakat; i.e., however in the

hereafter they will be punished in failure to abide by them, additional to the the punishment

for refusing to believe.

In a special muzakarah on imposing zakat on the legal entity recently, Dr. Aznan Hasan

suggested that it is allowable to impose zakat on non-Muslim shareholders similar to

Muslim shareholders.47 This is the view of some contemporary scholars like Sheikh Qurrah

Daghi, Dr Yusuf al-Qardawi, Dr Hannan ‘Abd al-Rahman Abu Mukh48. To quote from Dr

Hannan:

"علي أن للشركة التي تريد أن تزكي أموالها أن تضع ضمن شروط عقد المساهمة معها أنها تأخذ

مقدار الزكاة من جميع أموال المساهمين في الشركة، وعندئذ إذا وافق المساهم غير المسلمين

علي هذا الشرط فال حرج أن تؤخذ من المساهمين غير المسلمين وال حرج أن تصرف في مصارف

ة، وإن لم تسم الزكاة بالنسبة لهم شرعا".الزكا

This same opinion has been asserted by al-Qurrah Daghi.49According to him in general it is

not permissible to impose zakat to non-Muslim shareholders however if they agree to

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50 Abu ‘Ubayd, Kitab al-Amwal, Dar al-Kutub al-‘ilmiyyah, Beirut, 1st Edition, 1986, p. 33 51 al-Zayla’I, al-Bahr al-Ra’iq, vol. 2, p. 250. 52 It should be noted here that this opinion is a matter of dispute among the jurists. Some jurists disagree to this opinion and maintain that the money shall be distributed to others, not the beneficiaries (asnaf) of zakat (see: Abu Ubayd, Kitab al-Amwal, p. 540. I believe whilst this amount can be used for other things as well, there is no harm in distributing the amount to the beneficiaries of zakat. 53 Al-Kasani, Bada’i al-Sana’I, vol. 2, p.38

follow the company policy as required by law in paying zakah, then there is nothing wrong

with that. In this case zakat is imposed on the gross income of the company regardless of

the religions of the share holders. This is based on the ground of exemption isti’nas (rules of

thumb) as per what Umar al-Khattab decided for jizyah taken from Bani Taghlib where they

refused to pay jizyah. This is established on the basis of agreement of each shareholder as

difficult to desegregate between the shareholders stake as well the company shares has

been listed on bourse.

Dr Aznan refers to a report by Abu ‘Ubayd50 when Umar intended to take jizyah from the

Christians of Bani Taghlib, al-Nu’man bin Zar’ah (or Zar’ah bin al-Nu’man) said to Umar: “Oh

Amirul ukminin, Bani Taghlib are Arab. They are dismayed at the word jizyah. The do not

have money. They are people of agriculture and cattle and they can be instigated by our

enemy. Please do not help your enemy by drifting them away.” Umar then reconciled with

them on the condition that they pay double the amount of zakat.” As said by al-Zayla’i, this

payment of sadaqah is not jizyah51:

واستثنى في البدائع نصارى بني تغلب ألن عمر صالحهم من الجزية على الصدقة المضاعفة فإذا

أخذ العاشر منهم ذلك سقطت الجزية

Even al-Kasani has gone further by stating that what was taken from Bani Taghlib took the

same ruling like zakat. The only different is that the amount is more52. He noticed53:

ألن المأخوذ من بني تغلب يسلك به مسلك الصدقات ال يفارقها إال في التضعيف "....

“For whatever taken from Bani Taghlib takes the rules of zakat except the additional

amount”

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54 Dr Aznan bin Hasan, Zakat on Shakshiyyah i'tibariyyah, Workshop on Zakat for Islamic Financial

Institutions, BNM Lanai Kijang, 3 May 2011.

Dr Aznan asserted from the above discussion, that it is allowed for Islamic financial

institutions to pay the whole amount as zakat without even deducting the portion of non

Muslim. Whilst on the portion of the Muslim the payment is considered zakat, the portion of

non Muslim, though does not take the rules of zakat, in term of rewards, but as said by al-

Kasani, can still take the rules of zakat in term of distribution.

He concluded that it seems that Umar (rd) took from them the amount under the name of

sadaqah (zakat). Though some jurists tend to limit this application on the case of Bani

Taghlib only, he said he believes that there is no harm of extending the same principle to the

payment of zakat on Islamic financial institutions, simply because there is a need for that,

and there is no harm in doing so.

Dr Aznan remarked that Shaykh Yusuf al-Qardhaqi did not directly discuss this matter. He did

not discuss the issue of al-shakhsiyyah al-I’tibariyyah (legal entity) in his important book, fiqh

al-zakat. Nevertheless, he did discuss the imposition of the equivalent amount of zakat to be paid

by non Muslim under different name. He is of the opinion that nothing wrong in Shariah to

impose such a payment. He referred extensively to the story of Bani Taghlib in supporting his

argument on that. If we were to apply the same on our case, we can use the same argument.

Whilst zakat is imposed on the Muslims shareholders, the same amount is also imposed on the

non-Muslim shareholders, by whatsoever name. To ensure consistency in the financial report and

the give the effect of shaksiyyah I’tibariyyah (legal entity), I believe there is no harm to use only

one term, i.e., zakat in the financial reporting for both the ownership of the Muslim and the non

Muslims alike.54

However this humble paper would suggest that it is permissible to impose zakat on Islamic

financial institution but only on the shares owned by Muslim shareholders for their

respective shares and the non Muslim shareholder is not counted at all. But if they insist to

pay zakat, or if it is legally required by the authority, the payment can be accepted but

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should treated as a charitable donation not zakat.

This is for a number of reasons:

a) Non believers are not obligated (ghair mukallaf) to perform zakat, if they perform it, it is

not valid. Because zakat is an act of worship (ibadah)which has pillars and conditions

among others, intention, full ownership by specific Muslim owners and only obligatory on

the Muslims. Any act of performance of worship by non Muslim is void such as prayers and

fasting. The same rule applies to zakat. If we were to impose zakat on non Muslim, why not

imposing other acts of worship like five daily prayers, fasting and hajj.

b) The validity of analogy (qiyas) with Bani Taghlib Christians can be challenged as orginal

case of qiyas cannot be an exceptional case for rules of exceptional circumstances cannot be

extended to a new case. The tribe was actually paying double amount as compared to other

tribes who took a truce. They would prefer to call that financial commitment (jizyah) as

sadaqah similar to the Muslims. To Omar R.A., as long as they paid their jizyah which is

totally different from zakat even in calculation, then they can call whatever they like. It is

argued that zakat has its own salient features and can be used interchangeably with

sadaqah even though the word sadaqa is more general. Similarly by analogy, a non Muslim

can fast if they like, and they can be proud of it, but is that valid or is he rewarded for that?

And of surety they are not obligated to fast in the month of Ramadan and no Muslim

authority can force them to pray, fast or perform hajj.

c) If zakat is levied on Islamic Financial Institution owned by non Muslim as a legal entity,

then any legal entity for halal business is also obligated to pay zakat.

d) The taklif Sharie (religious obligation) of companies is questionable as they themselves

are owned by their respective owners. One should not confuse himself between the term

legal capacity as widely used in the modern legal terms to reflect the individual qualification

in entering into a contract which also includes a legal entity. This is because taklif is about

religious obligation with which one is answerable before Allah in this world and hereafter.

Hence the owners are religiously and legally accountable, not the legal entity. The legal

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55 al-Ghufali, Abdullah Mansur, Nawazil al-Zakah, Bank al-Bilad,2008 ,pp 169-170.

entities are not accountable before Allah in the day of Judgment like human being. Even if

these legal entities do not pay zakat, still the individual Muslim owners held liable for

paying zakat on their property.

ZAKAT OF DIFFERENT ASSET CLASSIFICATION AT ISLAMIC FINANCIAL INSTITUTIONS

1-ZAKAH ON THE CURRENT ACCOUNT

In this issue, the ruling of zakah shall be considered as zakah on debt (dayn) which the

debtor has full capacity to pay back in any time. This is because the concept of current

account is established on the based of debt. Hence, the relation between the bank and the

depositors could be considered as the debtor and creditor. In this case, the depositors as the

creditor should be to pay the zakah on their debt and not to the bank. Thus, the depositors

are borne to pay the zakah for his amount in the current account even the money still on the

hand of the debtor (bank). This is because the bank almost has full capacity be able to pay

the debt back at anytime. Therefore, the depositors (creditor) in this light, shall be to pay

the zakah for his current account amount once satisfy all the zakah requirements such

attains the certain nisab as well hawl.55

As such it is not the bank’s responsibility to pay zakat on behalf of depositors. The principle

of khultah cannot be used here. This is because all the deposits taken from the depositors

are based on principle of loan. The creditors responsible to pay their zakat provided that all

the conditions of zakat are met. The bank should not pay zakat on behalf of current account

depositors.

2. Zakat on Mudarabah Based Account

Mudarabah has been extensively used for general investment account, special investment

account, saving account investment funds and sukuk.

From the classic fiqh perspective, it is agreed upon that in case of mudarabah the capital

13

56 Fath al-Qadir, vol.1, pg 531. 57 Sharh al-Zarqani ‘ala mukhtasar Khalil, vol.2, pg 160. 58 Hashiat Qalyubi wa Umairah, vol.2, pg31. 59 Ibn Qudamah, al-Mughni, vol.3, pg.38.

providers are responsible to pay zakat on the capital of the venture. However the jurists

differ on who will be liable to pay zakat on the accrued profit.

The Hanafite opines that the mudarib has to pay zakat if there is any accrued profit

provided that it meets the nisab.56

The Malikites hold that the capital providers shall pay the zakat of the capital and his

portion of the accrued profit every year in case retail traders. As to the mudarib, he is only

obligated to pay zakat after distribution of profits for only one year57. This happens when

the tenure of Mudharabah is over a number of years.

The Shafites hold that the zakat for both the capital and profit shall be borne by the capital

provider. If it is taken form the mudarabah fund it shall be taken from the the gross profit

because it is regarded as the expenses of the operation. This is because he is the owner of

the fund. The mudarib however does not own anything except after distribution of the

profit. This is based on the assumption that the mudarib does not own the profit

constructively except after realizing during distribution.58

The Hanbalis hold that zakat is on the capital provider on the asset entirely except for the

portion of the mudarib because this portion belongs to him, and the capital provider should

not be accountable for the others obligation. At the point of distribution, the mudarib

actually starts his calculation for the new financial year.59

In this light of classic fiqh opinion, one may suggest that in case of mudarabah based

account which is normally used for general investment account, saving account, special

investment account and recently for the current account it is the responsibility of mudarib

to pay zakat for their capital. It is submitted that the mudarabah as per deliberated by the

Jurists in the past was based on mudarbah issue alone which is not associated with khultah

as most of the jurists who hold the view of khultah (mixed asset) did not apply the rule to

14

6060 Al-Mawardi, Abu al-Hasan Ali bin Muhammad, Al-Hawi al-Kabir, vol. 3, pg. 140.

other than livestock.

Even if we adopt the opinion of khultah, there are still a number of conditions should be met

for example the all the owners are Muslim.60In case of Mudarabah accounts, not all the

investors or depositors are Muslims. Therefore the validity to impose zakat on the

mudarabah depositors is still questionable.

Alternatively the bank can pay zakat on behalf of the depositors provided that all the

conditions of zakat is considered like segregation of the Muslim and non Muslim’s fund. This

looks impossible. If it is required by law for Islamic banks to pay zakat on behalf of

depositors, there must be a clear notification to the depositors so that they are aware and

hence give consent to authorize the bank to pay zakat.

3. Zakat on Wakalah Bi al-Istithmar Based Account

It is appointing bank as the investment agent where the depositors as principals authorize

the bank to invest their moneys and the bank is entitled to get a fee for the services

rendered. The service is normally charged upfront also based on the performance

incentives. This principle is also used for Islamic investment fund and Islamic mutual funds

or unit trust where the investors as unit holders are the principles and the fund manager is

the investment agent. However most of the unit trust fund managers only charge the fee

upfront. Therefore they already get their remuneration regardless of the performance of the

fund. In other words, there is nothing that push them to work hard to maximize the profit in

the investment as there will be no incentives for them. Perhaps the only pushing factor is

the performance figure to impress the new investors.

As far as zakat is concerned, based on the principle of khultah, according to Abu Hanifah

and some Malikites zakat is obligated on every respective individual investors. As it is

individual commitments, one has to know his nisab and does the calculation and also pays

zakat on his own. It is suggested that the responsibility of zakat payment is almost similar to

15

investors or capital providers of mudharabah. Since they are the owners of the fund, they

are responsible to pay zakat.

However if it is the policy of the investment fund or it is required by law, than it should be

clearly stipulated in the prospectus or through notifications to the investors. Perhaps a

better alternative is to make it optional to every individual or constitutional investors to

decide whether they opt to authorise the investment agent to pay zakat on behalf of them.

Or perhaps it is also fine to leave the responsibility of zakat to the each investor as some

investors are non Muslim and some of them did not invest only a little amount of money

which does not reach the nisab.

As to the investment agent either the bank or fund manger, they are liable only to pay zakat

for their fees which are collected upfront plus the performance incentives.

4. Zakat on Savings at Tabung Haji

The interesting part of deposit taking at Tabung Haji is that the contributions come from

only Muslims. It is observed that among the significant condition of zakat is that the owner

of the zakatable asset is a Muslim regardless of his/her ages. The principle of khultah can be

applied here. The entire pool of fund can be treated as one asset, one nisab regardless of

how much is the contribution of respective depositors. However the depositors must be

clearly informed either in the application form, notice or other means of communication to

authorize the management to pay zakat on behalf of them. This is so if we treat the

contractual relationship between the depositors and the management as mudarabah or

wakalah bi al-istithmar.

Yet, other unresolved Shariah issue with regards to the deposits at Tabung Haji is to define

what contract used for the deposit taking. It is not stated at all whether it is wadiah, qard,

mudarabah or wakalah bi al-istihtmar.

16

5. Zakat of Takaful Funds

As for takaful shareholders account, they are accountable to pay zakat individually or

collectively based on the principle of khultah as discussed above. As for the participant

personal investment account, the accountability of zakat will be similar to mudarabah or

wakalah bi al-istithmar account as discussed above where the owner of the fund shall bear

the responsibility.

As for the Tabarru‘ fund (risk fund), the question is who is the owner of the mixed donated

fund? If it is stated in the takaful contract that the contribution of the participant is a

complete pure donation, than this would fall under categories of charities which is not

zakatable and at the same time they are not entitled for the surplus sharing. Any surplus

shall be retained by the fund. However if it is based on the principle of al-iltizam bi al-

tabarru‘ (a promise to donate), then the participants retain the ownership of the fund. Since

the owner is known, they are obligated to pay zakat. They may appoint takaful operator to

do it on behalf of them. As for surplus sharing, yes they are entitled to it since it is their

money.

It is always worth nothing that there should be two different accounts at takaful; one

belongs to the shareholders and the other is for the tabarru‘ (risk fund) representing the

pool of contributions of the participants.

Conclusion and Recommendation

• The authority can levy any kind of tax for goods and services which includes Islamic

banking and takaful services owned by non Muslim shareholders but it should not be called

zakat.

• In some countries like Malaysia, there is no issue of injustice in imposing zakat on

the individual Muslim shareholders income since they will get tax exemption.

• There should not be double zakat i.e when the zakat is already paid by the

17

institution, the share holders are no longer obligated to pay zakat on their respective share.

• IFIs are not obligated to pay zakat for Deposits taken from depositors whether they

are based on Mudharabah, wadiah or qard. The rabb al-mal is responsible to pay zakat not

mudarib. As for the mudarib portion, he is bound to pay zakat after the distribution of profit

and after holding it for one year. As for wadiah and qard the owner of the fund who are the

creditors (depositors) to the bank are responsible to pay zakat on their own. However, they

can pay zakat on behalf of the depositors provided that all rules of zakat are followed and

with a clear consent from the owners of the fund.

Bibliography

Abu ‘Ubayd, Kitab al-Amwal, Dar al-Kutub al-‘ilmiyyah, Beirut, 1st Edition, 1986.

Abu Mukh, Hannan ‘Abd al-Rahman, Zakat al-Sharikat fi al-Fiqh al-Islami, Dar al-Ma’mun,

Amman, 1st Edition, 2007.

Al-Bahuti, Kashshaf al-Qina’, vol. 2.

Al-Bayhaqi, al-Sunan al-Sughra.

Al-Bukhari,Sahih al-Bukhari, Kitab al-Zakat, hadith no. 1382.

Al-Buti, al-Shaksiyyah al-I’tibariyyah, Ahalliyatuhawa Hukm Ta’aluq a;-Zakat Biha.

Al-Fatawa al-Hindiyyah, Waqf, ch.5, v.2.

Al-Ghafili, Abdullah Mansur, Nawazil al-Zakah, Bank al-Bilad,2008

Al-Hattab, Mawahib al-Jalil, vol. 2.

Ali Muhyi al-Din al-Qurah Daghi, , al-shakhsiyah al-I’tibariah wa Ahkamuha al-Fiqhiyyah fi al-

Dawla al-Muasirah.

18

Al-Kasani, Badaie’ al-Sanaie’, v5.

Al-Khurashi, Al-Khalil, v7.

Al-Mardawi, al-Insaf, vol. 3.

Al-Nawawi, al-Majmu’, vol. 5.

Al-Qarafi, al-Zakhirah, vol. 3.

Al-Qurrahdaghi, Buhuth fi al-Fiqh Qadaya Zakat al-Mua`sirah.

Al-Samarqandi, Tuhfat al-Fuqahak, vol. 1.

Al-Sarakhsi, Al-Mabsut, v14.

Al-Shafi`i, al-Umm, vol. 2.

Al-Sharbini, Mughni al-Muhtaj, vol. 1.

Al-Shirazi, al-Muhazzab.

Al-Zayla’I, al-Bahr al-Ra’iq, vol. 2.

Al-Zuhayli, Wahbah, al-Fiqh al-Islami Wa Adiilatuhu, vol. 3.

Syeikh Dr Aznan Hassan, unpublished paper on Zakat on Shakshiyyahi'tibariyyah,

Workshop on Zakat for Islamic Financial Institutions, BNM Lanai Kijang, 3 May 2011.

Article 4 of Sudanese Law on Zakat, in the Year 1990.

Ibn ‘Abd al-Barr, al-Istizkar, vol 1.

Ibn Manzur, Lisan al-al-Arab, vol 7.

19

61 Special thanks given to officer in Pusat Pungutan Zakat Wilayah Persekutuan for providing the statistic update till date.

Ibn Muflih, al-Furu’, vol.2.

Ibn Qudamah, al-Mughni, vol 10.

Ibn Rushd, Bidayat al-Mujtahid, vol. 1.

Shahatah,Shawki Ismail, Muhasabat Zakat al-Mal,’Iman wa Amalan, 1st Edition, 1970.

Usmani, Taqi, An Introduction to Islamic Finance, Maktaba Ma`riful Qur`an.

http://en.wikipedia.org/wiki/Limited_liability

Attachments

STATISTIC FOR ZAKAH ON COMMERCIALS BUSINESSES COLLECTION IN MALAYSIA

2007-2010.61

STATES 2007 2008 2009 2010

Selangor 43,745,324.00 46,109,153.00 51,852,929.00

60,517,310

.00

Wilayah Persekutuan

23,326,234.39

28,702,947.32

29,114,257.40

33,622,33

0.60

Johor 22,710,586.96 33,373,484.91 34,012,220.66

37,144,115

.67

Pahang 15,233,825.34 24,286,185.66 34,358,939.17

36,358,818

.26

Terengganu 15,037,326.72 20,470,497.81 21,627,115.12

20,696,100

.16 Perak 13,668,194.29 23,768,317.08 27,763,399.26

20

26,832,317.99

Kedah 11,276,500.60 16,170,728.20 14,176,138.09

16,431,006

.03

Kelantan 10,462,905.44 18,602,371.80 16,861,500.35

14,512,380

.97

Pulau Pinang 8,295,846.71 6,595,708.00 9,563,587.76

8,342,887.

62

Sabah 8,136,279.09 10,248,160.57 9,594,348.01

14,957,871

.97

Negeri Sembilan 6,115,142.45 9,055,100.32 8,948,204.46

11,321,245

.93

Melaka 5,774,729.72 7,168,162.76 7,731,375.72

8,045,943.

87

Sarawak 4,370,124.94 11,940,418.17 8,737,606.91

8,844,620.

25

Perlis 3,286,732.00 3,791,501.00 3,157,448.10

4,183,866.

00

TOTAL

191,439,752.65

260,282,736.60

277,499,070.01

301,810,815.32

STATISTIC FOR ZAKAH ON COMMERCIALS BUSINESS`S PAYERS IN WILAYAH

PERSEKUTUAN 2007-2010.

STATES 2007 2008 2009 2010 Johor 3,280 - 3,309 3,401 Pahang 1,948 1,970 2,180 2,272 Terengganu 1,657 - - 2,019 Melaka 1,079 1,114 1,225 1,248 Wilayah 1,062 1,169 1,302 1,429

21

Persekutuan Kelantan 957 1,132 1,257 1,341 Negeri Sembilan 917 986 1,085 1,097 Kedah 898 1,302 1,508 1,676 Pulau Pinang 722 698 767 819 Sabah 220 287 338 476 Sarawak 198 213 602 319 Perlis 193 243 229 183 Selangor - - 3,685 - Perak - - - -

TOTAL 13,131 9,114 13,802 16,280

STATISTIC FOR ZAKAH ON COMMERCIALS BUSINESS`S CATEGORIES IN WILAYAH

PERSEKUTUAN 2007-2010.

CATEGORIES OF ZAKAT

2007

(RM)

2008

(RM)

2009

(RM)

2010

(RM)

INCOME 109,800,306.20 137,571,807.25 167,483,687.12 192,723,071.57

COMMERCIAL 23,326,234.39 28,702,947.32 29,114,257.40 33,622,330.60

SAVING 13,670,863.27 15,063,180.16 18,373,003.78 20,843,849.85

QADHA 281,230.27 545,092.67 431,875.29 477,109.07

PROPERTIES 21,500,920.34 23,680,791.26 25,689,049.19 26,928,829.61

OTHERS 637,679.18 697,328.62 874,787.44 1,040,234.23

TOTAL 169,217,233.65 206,261,147.28 241,966,660.22 275,635,424.93

Based on the above mentioned statistics, we can sum up that the total collection of zakah in

Malaysia for 2010 is up to 301,810,815.32. With special reference given to the Wilayah

Persekutuan State statistic of the year 2010, the zakat on business have contributed up to

RM 33,622,330.60 compared to total of RM 275,635,424.93 zakah collection in which

represents 12.1 percent out of the total percentages. This is the second largest payers for

22

the Zakah payment after the Zakah on the income in which represent 69.91 percent from

the total percentages with the amount of RM 192,723,071.57. The number of payers for the

zakah on business as reported by PPZ Wilayah Persekutuan as at 2010 is about 1429

institutions or legal entities.